Interest-Rate Swaps and Arbitrage
Year: 2001 Volume: 51 Issue: 2 Pages: 99-110
Abstract: Three approaches toward the determination of fixed swap rates are presented in this article: a swap as a portfolio of bonds with a fixed and floating coupon, a swap as a portfolio of forwards, and a swap as the difference between the cap and the floor (zero-collar). Later in the paper, credit risk is taken in consideration. The credit risk of interest-rate swaps is much lower than that of loans or corporate bonds. Empirical research is presented to support the analysis. One of the most important determinants of credit risk in a swap spread is the yield curve slope.
JEL classification: G13, G39
Keywords: interest-rate swap; bonds; credit risk
RePEc: n/a
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